Using Monte Carlo Methods to Evaluate Sub-Optimal Exercise Policies for American Options

Abstract

In this paper we use a Monte Carlo scheme to find the returns that an uninformed investor might expect from an American option if he followed one of several näıve exercise strategies rather than the optimal exercise strategy. We consider several such strategies that an ill-advised investor might follow. We also consider how the expected return is affected by how often the investor checks to see if his exercise criteria have been met.